Betting the Lab
Introduction
In an industry focused on prolonging life, many companies die before ever reaching a first customer. Pharmaceutical (pharma) and biotechnology startups represent a distinctly ambitious business model, operating in a field where over 90% of businesses fail (Health Tech World, 2025). While small pharma companies are the backbone of drug innovation and tend to shoulder much of the risk of drug development, big pharma is usually needed to make these drugs commercially viable (von Dydiowa et al., 2021).
Don’t put all your eggs in one basket?
In the pharma startup space, keeping a well-diversified portfolio often has to take a backseat. In a study of 311 development-stage biopharma acquisitions between 2005 and 2020, the average acquired company had only three drugs in its pipeline, with one-third of firms having just one (Michaeli et al., 2022). For these companies, simply developing more drugs is usually not possible. On average, it takes 10-15 years after discovery for a drug to reach the market, if at all, with each drug requiring about $1-2 billion in research and development expenses (Abrahams et al., 2017). Given these high financial and time commitments, firms can only feasibly raise enough capital to work on a limited number of drugs at a time, making diversification largely unattainable (Stoll et al., 2024). Additionally, a report by McKinsey & Company suggests that producing within one therapeutic area enhances efficiency through specialization, leading to faster and higher quality drug development, somewhat counteracting concentration risk (Elling & Tinkoff, 2017).
How Pharma Startups Raise Funds
Given pharma startups’ long development phases, they are often unable to generate revenue for years. As a result, they must look externally to fund their operations. Since pharma startups are so risky, the ways they raise capital can be quite different compared to other industries. Debt tends to be less desirable for startups, because high-risk companies have to pay higher interest rates. Instead, pharma startups tend to raise funds through investments from venture capitalists or by issuing stock to the public (Capra et al., 2023). This equity-based approach is often the most mutually beneficial for pharma startups and their investors, because it gives the startup an affordable way to cover their expenses while offering investors the potential for high returns through a stake in the company.
End goal
Mergers and acquisitions are an essential pillar of the pharmaceutical industry. In 2020, nearly 62% of drugs approved by the FDA came from early-stage startup companies (Girvan, 2024). However, many smaller pharma companies do not have the infrastructure or capacity to commercialize their drugs, so they get acquired by a large pharmaceutical company that does. This allows the small pharma owner to cash out on their business while helping a larger pharma company easily diversify its drug portfolios (Kaetzler et al., 2024). Diversification is particularly important for large pharmaceutical companies, because it helps mitigate the effects of their top-earning drugs’ patent cliffs. Patent cliffs occur when a drug’s period of regulatory exclusivity runs out, allowing generics or biosimilars to flood the market and drive down the price (Möller et al., 2025).
Despite the fundamental uncertainty of a given pharma startup’s earnings potential, they can achieve very high valuations. For example, in October 2025, Novartis agreed to acquire Avidity Biosciences, which has yet to release a drug to the market, for $12 billion, representing roughly a 42% premium. Novartis states that Avidity’s RNA therapy technology will “unlock multi-billion-dollar opportunities with planned product launches before 2030” (2025).
The Prognosis
The speculative nature of how pharma startups operate may seem daunting, especially given the fact that upwards of 90% of products fail clinical trialing (Sun et al., 2022). However, when seen from a bird’s-eye view, the logic behind the system becomes clear. Since the profit potential is so high, there is plenty of incentive for startups to enter the space and for investors to invest in those startups. However, there are potential concerns with the rapid consolidation intrinsic to this system. As larger pharma companies continue to expand through acquisition, they obtain stronger pricing power and are more capable of squeezing out competition. So far, this has not seemed to impact innovation, as the incentive structure for smaller pharma companies remains intact. But consumers, particularly in the United States, have noticed the impact of big pharma’s pricing power. As the industry continues to consolidate and prices continue to increase, the consumer will become increasingly worse off, potentially spurring government intervention. Whether this comes in the form of heightened anti-trust legislation, some extension of Most Favored Nation pricing policies, or any other alternative is up in the air. Regardless, the sustainability of the current model will continue to be questioned by consumers and legislators alike until there is a change.
Edited by Caitlin Williams
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